In view of the changes that are happening in Indonesia at the

In view of the changes that are happening in Indonesia at the
moment -- the country's movement from an autocratic government to
one that is more democratic, the change from a very centralized
system to a decentralized one - and the fact that the country is
still trying to recover from the conomic crisis, we don't expect
all these things will change overnight but realize they will take
some time to work through.
Meanwhile, if you look at the mining industry itself, and the
part of the mining industry that Rio Tinto participates in --
large-scale mining - there are some particular characteristics.
For one, it's a high-risk industry, and it requires investment
for a long time in advance before you get your return.
For mining investors, it's very difficult to make investment
decisions in Indonesia when there are a lot of changes and
uncertainty.
One way to address this is to have a strong regulatory
environment. However, if we look at the regulatory framework,
we've got the forestry law since 1999, which bans open-pit mining
in protected forests, and not the mining law, which is still in
process. The problem is not just the laws.
Since the implementation of the autonomy law in 2001, the
provinces and regencies have been issuing a number of rulings,
which frequently conflict with the government's regulations or
are contrary to the terms we agreed upon in the contracts of
works.
Finally, investors have no confidence in the court system.
Honestly speaking, the government has made progress in some
areas, including in stabilizing the macro economy and in
constitutional changes to allow more democratic political system.
Yes, the government has made progress in dealing with big issues,
but the challenges for the mining industry still remain to be
addressed.
With regard to the forestry law, it's up to Indonesia to decide
what mining regime it wishes to have in place. But the country
can't change fundamental economics. If the country says we don't
want open-pit mining, in many cases the cost of the coal produced
by the country's mines will be much higher and the mines will not
be able to compete economically with those in other countries
that allow open-pit mining.
So if Indonesia decides to only allow underground mining, the
consequence is some mines will no longer be economically feasible
and will be closed.
The other side is that if you have no open-pit mining in the
domestic environment, you will probably have to pay more for
coal. Subsequently, you will have to pay more for power and
cement.
As a mining company, we are happy to operate in whatever mining
regime the country establishes. We will operate open-pit mines to
world-class environmental standards, and we can minimize the
environmental damage by conducting rehabilitation to the standard
that is acceptable to the local communities.
But if the country says no to open-pit mines, we have to make a
decision whether to invest or not. In some cases, we probably
would not proceed.
We always respect the law of the country that we operate in,
including the forestry law of 1999. As a result of that, we will
no longer conduct exploration in the protected forest areas. But,
my concern is that when the law was passed, quite a few companies
had been awarded contracts within the areas subsequently
designated protected forest areas.
What I believe should have happened was that in drafting that
law, someone should have made a provision on transitional
arrangements for contracts that were in place. I think it would
have been more helpful had there been such an arrangement to
respect the rights of investors. That would have been helpful in
maintaining confidence in investment in Indonesia.

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